In Pulse Technologies, Inc. v. Notaro and MKPrecision, LLC, No. 6 MAP 2012 (M.D. S.Ct. PA May 29, 2013), the Supreme Court of Pennsylvania overturned a Superior Court’s decision to invalidate a restrictive covenant contained in an employment agreement on the ground that it was not expressly referenced in the initial offer letter.
The employee, Peter Notaro, was sent a two-and-one-half page formal offer of employment letter from Pulse Technologies, Inc. (“Pulse”). The offer letter contained provisions describing the position, responsibilities, salary, benefits, effective date and confidentiality. The letter also indicated that, on the first day of employment, Mr. Notaro would be required to sign an Employment Agreement with “definitive terms and conditions…contained herein.” The offer letter also stated that Pulse would not be able to employ Mr. Notaro if he failed to sign the Employment Agreement. The Employment Agreement contained a post-employment noncompetition restrictive covenant. Mr. Notaro signed the Employment Agreement without objection to any of its provisions.
Five years later, Mr. Notaro left Pulse to work for MK Precision, LLC (“Precision), a competitor. Pulse sought a preliminary injunction enjoining Precision from employing Mr. Notaro.
The trial court granted Pulse’s injunction, but the Superior Court vacated the injunction based in part on the fact that Pulse sought to enforce a restrictive covenant that was agreed to after Mr. Notaro had commenced employment.
The Supreme Court disagreed and found that the offer letter was part of the hiring process and constituted only evidence of negotiations. It was not a binding contract of employment. Also, the language in the offer letter demonstrated that execution of the Employment Agreement containing the restrictive covenant was a precondition to actual employment. Thus, the Employment Agreement containing the restrictive covenant was supported by valid consideration and was enforceable.
In Pennsylvania, post-employment restrictive covenants are enforceable if supported by consideration, either in the form of an initial employment contract or a beneficial change in the conditions of employment. If there is a contract of employment in existence (whether oral or in writing), then the addition of a non-compete covenant would have to be supported by new consideration to be enforceable. In this case, the Supreme Court found that there was no contract of employment when the offer letter was given to Mr. Notaro since it specifically stated that he had to execute an Employment Agreement as a condition of employment.
The Pulse Technologies, Inc. case reminds employers subject to Pennsylvania law that: (i) if employees will be expected to sign an employment agreement with restrictive covenants, employers should be made sure that an oral contract of employment is not established prior to the employment agreement being presented to the prospective employee; (ii) offer letters should be expressly conditioned upon the execution of an Employment Agreement if restrictive covenants are not contained in the offer letter itself; and (iii) if restrictive covenants are to be imposed after a contract of employment has been mutually agreed upon, then the covenants must be supported by new independent consideration; continued employment is not enough (even if employment is at will).
Should you have any questions regarding restrictive covenants or employment law in general, please contact Terry Connerton at 412.918.1160.